Dissecting Retirement Savings

Saving for retirement is a given, but how can you get the biggest bang for your buck?

When I finally and completely quit my once-full-time job in May, something changed: Neither my husband nor I have access to an employer-sponsored retirement plan. With a significant drop in income, we're looking at maximizing our now small retirement account contributions. So, how can we get the biggest bang for our buck?

Before we talk about that, let me fill you in on my retirement contribution history. I did some things right and some things wrong. When I turned 21, I was allowed to start contributing to my employer-sponsored retirement plan. While I wasn't completely finance-savvy, I had heard that I should contribute enough to get the maximum employer match, so I did. Six percent of my paycheck went into my 401(k) and another 3 percent came from my employer.

I had also heard that when I got a raise, I should increase my contribution. I did that too, all the way up to 10 percent. And when I left that position (and subsequent positions), I rolled every retirement plan into IRAs or Roth IRAs (I have both) that my financial advisor relative recommended.

And our retirement savings has kind of run on autopilot ever since.

Now that we have experienced the significant drop in income I mentioned above, I am focused on the 7 percent we currently save for retirement. I have lots of questions.

Do we need to continue to save for retirement at all?I can't believe I am even writing this question on a personal finance blog, but have you seen the charts that compare two people and the magic of compound interest? One person started at, say, age 20, and saves a reasonable amount each year for 10 years. The other person started at age 40, saves a lot more money and still has less money, significantly less money, at traditional retirement age.

My husband and I started our retirement savings early. While we didn't always save even 10 percent of our income, our retirement savings has already grown to a significant amount. By plugging numbers into retirement savings calculators, it seems like we would have a comfortable retirement, using conservative returns and a 3 percent inflation rate, especially considering our low cost-of-living area.

So, do we continue to save or not? First, I wrote an article asking a similarly crazy personal finance question: Should you have an emergency fund? In that article, one of the readers said that she would have used my post for an excuse NOT to have an emergency fund. I don't want you to use this post as an excuse NOT to save for retirement because Americans already don't save enough for retirement. But I do want to share our thought process about our future.

The answer, at least at this time, is that we do need to save for retirement. There are simply too many unknown factors: What will inflation be? Will we live more than 20 years after retirement? Will our retirement expenses be higher than expected?

Should we be contributing more than 7 percent of our income to retirement savings?By only contributing 7 percent of our income to retirement savings, we're well below the 2014 IRS individual contribution limit of $5,500. Since the U.S. tax code currently offers a full tax deduction up to the maximum contribution limit for traditional IRAs, we are missing out on some tax benefits.

Still, we intend to have a conservative retirement, so again, thanks to our early start, we should be fine.

Is our current method of retirement savings the best we can do?Had I known about index funds, fees, returns, and that nobody cares about my money more than I do, I would have done some things differently. When it was time to roll over my old 401(k)s, I asked a financial advisor for advice. I rolled them over, signed the paperwork, and have contributed a small monthly amount ever since. Only recently did I actually check more closely — and, naturally, I found two issues that I should have caught years ago. (Please ignore the fact that I write for a personal finance blog.)

First, my mutual fund company charges a 5.75 percent sales charge off the top of all my original contributions. So that means a $100 investment is immediately whittled to $94.25. How did I miss that?

Second, the return for our mutual funds is lower than the stock market.

Why didn't I roll them into index funds? Well, for years, I didn't know what an index fund was. But I know now, and I still haven't done anything about it. So no, our current method of retirement savings is not the best we can do. When you're only contributing 7 percent of your income, it seems really stupid to give up a 5.75 percent sales charge.

My plan is to cancel our future contributions to this mutual fund while (for now) leaving the rest of the money in these mutual funds. After all, we've already paid the sales charge. But for the future contributions, we're planning to invest in index funds.

Should we be investing in something else?"I don't have an IRA or a 401(k) or anything," one of my friends confessed. "Instead, we keep investing in our businesses."

She's my age, with a significantly higher net worth than I have, even though they don't have any traditional retirement savings. It made me question our methods: Should we have some additional diversification? Rental property? Businesses?

Then I had a reality check. If I don't have enough time to pay as much attention to the investments we do have, I certainly don't have time to manage rental property. At least, not right now. Perhaps this will change in the future, but I need to optimize what we already are doing.

As you can see, retirement savings can be complicated. However, even though I made several mistakes, the important things are still to start saving as early as possible and save as much as you can. Those two things should cover a multitude of (but not all) errors.